Introduction to Public Choice Theory

By Leon Felkins

Written Jan. 10, 1997

Latest revision: 12/22/13

The social phenomena discussed in this series of essays all center around the problem of individuals in groups faced with the choice of doing what is best for themselves or what is best for the group. Instances of the phenomena are called by many different names: "Volunteer's Dilemma", "Prisoner's Dilemma", "Collective Choice", "Rational Choice", "Social Choice", and "Voter's Paradox" to list just a few. Unfortunately, the academic programs that cover these various manifestations of the "individual vs. group" dilemma do not fall under one discipline. You will not find the "Social Dilemma" department at any university.[1] But you can specialize in certain aspects of the general problem by signing up in the Political or Economics departments (and possibly others). In particular, some universities now offer an advanced degree specializing in what is called Public Choice Theory, (e.g., George Mason University), and several offer specialization in "Political Economics", (e.g. University of Washington or in "Political Economy", University of Michigan).

Public Choice Theory is directed toward the study of politics based on ecomonic principles. I would think you would be immediately puzzled by this, since most universities already have a Political Science department. The problem is that until Public Choice Theory came along, universities did not teach the way politics actually functions but, instead, taught the way it should work ideally or the way they wished it would work. This practice of teaching what should be (normative theory) rather than what is (positive theory) is fairly common at universities and continues to this day at most universities, in politics as well as other disciplines. Fortunately, if you look carefully, you can find some universities that teach the facts about politics, to the best of our abilities to understand it, and that discipline is called Public Choice. I should point out that Public Choice is actually more general than just politics, but that is its main emphasis.

Let us examine various aspects of the theory.

"We do it just for you!", per Ronald McDonald

Well, not really. Politicians do not devote their lives for your and my benefits anymore than McDonalds does. Strangely, however, many people think so -- including university professors that teach politics and philosophy. The most important contribution of Public Choice Theory is that it recognizes that politicians are motivated by self interest -- just like you and me. In fact, more so than you and me! If that is so, and it is, then our expectations of politicians changes dramatically. A politician's self interest is far more serious than yours and mine for their self interest actions can be disastrous for the rest of us -- such as sending thousands of young people to prison or to be killed in a pointless war, just to improve their political situation. One point worth noting here is that the Founding Fathers of the U.S.A. understood that and they tried to organize government in such a way as to minimize the impact of self interest. They did a good job and the fact that we are having so much trouble with our government today results from our losing sight of the reality that politicians are self-interested and the public not enforcing the laws the Founding Fathers created.

To summarize this most important aspect of Public Choice Theory, I will quote a paragraph from an essay by Paul Starr, "The Meaning of Privatization":

"Public choice," ill-named because the only choices it recognizes are essentially private, is both a branch
of microeconomics and an ideologically-laden view of democratic politics. Analysts of the school apply
the logic of microeconomics to politics and generally find that whereas self-interest leads to benign
results in the marketplace, it produces nothing but pathology in political decisions. These pathological
patterns represent different kinds of "free-riding" and "rent-seeking" by voters, bureaucrats, politicians,
and recipients of public funds. Coalitions of voters seeking special advantage from the state join together
to get favorable legislation enacted. Rather than being particularly needy, these groups are likely to be
those whose big stake in a benefit arouses them to more effective action than is taken by the taxpayers
at large over whom the costs are spread. In general, individuals with "concentrated" interests in
increased expenditure take a "free ride" on those with "diffuse" interests in lower taxes. Similarly, the
managers of the "bureaucratic firms" seek to maximize budgets, and thereby to obtain greater power,
larger salaries, and other perquisites. Budget maximization results in higher government spending
overall, inefficient allocation among government agencies, and inefficient production within them. In
addition, when government agencies give out grants, the potential grantees expend resources in lobbying
up to the value of the grants--an instance of the more general "political dissipation of value" resulting
from the scramble for political favors and jobs.

Another useful summary of Public Choice Theory is presented in the following paragraph quoted from a York University document (apparently no longer online), "PUBLIC CHOICE AND BUREAUCRACY" (author not identified):

It is the behaviour of public sector bureaucrats which is at
the heart of public choice theory. While they are supposed to
work in the public interest, putting into practice the
policies of government as efficiently and effectively as
possible, public choice theorists see bureaucrats as self-
interested utility-maximizers, motivated by such factors as:
"salary, prerequisites of the office, public reputation,
power, patronage...and the ease of managing the bureau."
(Niskanen, W.A. Bureaucracy: Servant or Master? (London:
Institute of Economic Affairs, 1973)).

At the heart of all public choice theories then is the notion
that an official at any level, be they in the public or
private sector, "acts at least partly in his own self-
interest, and some officials are motivated solely by their own
self-interest." (Downs, Anthony, Inside Bureaucracy (Boston: Little, Brown
and Company, 1967)). For Downs, broader
motivations such as pride in performance, loyalty to a
programme, department or government, and a wish to best serve
their fellow citizens may also affect a bureaucrat's
behaviour, and the level to which self-interest plays a role
in decisions is different for each of five bureaucratic
personality types that he identifies. For Niskanen, self-
interest is the sole motivator.

The realization that politicians and government employees are driven by self interest is an extremely serious conclusion. The question immediately comes to mind, "How far will they go?" The answer to that is profound and extremely disturbing, for history shows us that they will -- to advance their own careers -- subject thousands of citizens to abuse, torture, starvation, confinement, and yes, death.

Of course hardly anyone would argue that Hitler and Stalin (and Saddam, on a lesser scale) had millions tortured and killed to apease their own lust for power and wealth. But what about politicians in so-called "free societies", like the US and Britain. The difference is only in scale and subtlety. A good case can be made that most of the wars that the US has found an excuse to be the dominant force in since World War II was to further various politician's lust for power and wealth. This also applies to the bureaucrats, contractors, and military leaders that promote war in order to advance their own career and to sell merchandise. Bureaucrats and others in the "Military/Industrial Complex" make no apologies about promoting in any way they can their war machines in order to further their own careers. As a former military officer, assigned to the procurement business, I personally observed these actions first hand. It was not a pleasant business to be involved in!

Yes, Public Choice Theory exposes some really nasty aspects of governance, but let us get back to a less disturbing side of the story, some history.

Some History of Public Choice Theory

James Buchanan, (winner of the Nobel Prize in Economic Science, 1986, for work in Public Choice) and Gordon Tullock are credited with being the primary developers of Public Choice Theory. Their book, Calculus of Consent, published in 1962, is still considered the classic piece on this subject. To learn more about the history of Public Choice, see an interview of James Buchanan, himself, available on the internet. I will quote a couple of interesting passages:

Tullock and I considered ourselves to be simply taking the tools of economics, looking at something like
the structure of American politics in the way James Madison had envisioned it. That is, it was clearly
not a majoritarian democracy, which would be the parliamentary model (which was the ideal, at that
time especially, of all the political scientists), rather it was a sort of a constitutional structure. We were
the first to start analyzing the Constitution from an economic point of view. There were other people
who analyzed particular voting rules, like majority voting, but we put that in a constitutional structure
and provided an argument for choices among voting rules. We concentrated on that. So, in a sense, I
considered us to be simply writing out in modern economic terms more or less Madison's framework of
what he wanted to do, as opposed to anything new and different. It turned out that nobody had looked
at it in that way.

And:

[Public Choice] is nothing more than common sense, as opposed to romance. To some extent, people
then and now think about politics romantically. Our systematic way of looking at politics is nothing
more than common sense.

I completely agree with that statement! Apparently common sense is in short supply at the universities for it took until the 1950s and 1960s for them to discover what is evident to most citizens and, in particular, had been commented on by philosophers, humorists, and cynics[2] for many years prior to this academic "discovery".

The Back of the "Invisible Hand"

In The Wealth of Nations Adam Smith postulated the concept of an 'invisible hand' that would lead individuals to
further the common interest through the pursuit of their own self-interest. The success of the free market of private goods, compared to the failure of socialism's controlled distribution of private goods, is a strong demonstration of this concept. To extend the "invisible hand" concept to public goods, however, is a mistake -- a mistake easy to make because so many at the universities and in the news media deny the success of the free market concept! That is, the fact that the free market works so well with private goods when many academics discredit it is no reason to conclude that the academics are also wrong with regard to their belief that the free market will not be successful with public goods.

A good exposition of the myth that the free market somehow will also solve the problem of the distribution of public goods is found in the chapter titled, "The Back of the Invisible Hand" -- from which I got my heading for this section -- in the book by Russell Hardin, Collective Action. He says,

"One may sense, however, that all too often we are less helped by the benevolent invisible hand than we are injured by the malevolent back of that hand; that is, in seeking private interests, we fail to secure greater collective interests. The narrow rationality of self-interest that can benefit us all in market exchange can also prevent us from succeeding in collective endeavors."

That is, the pursuit of self interest magically promotes the common interest when we are dealing with private goods, but it usually does not when we are dealing with public goods. Why this is so is the primary subject of this series of essays, the "Social Dilemmas", which I encourage you to read. One example will suffice here to illustrate the phenomenum.

Consider the fisheries and the ocean and assume that the collection of fish in the ocean is a "public good". What is the economic motivation for each fisherman? To take all he can, right? For, if a consceintious fisherman says to himself, "This is no good, grabbing all we can. I will limit my fishing, which I hope others will do the same, so as to preserve the fishery for the long term.", he will just lose for the other fishermen will continue with the over-fishing. So, to maximize his own return, he grabs all he can and so do the others. The fishery collapses from over fishing.

That this does not happen in the market of private goods is routinely demonstrated at the university in courses on Economics or, better yet, the local shopping mall.

Some Other Aspects of Public Choice Theory

What are some of the other aspects of collective activity that Public Choice Theory covers?

Constitutional, Democratic Government

Public Choice theorists attempt to examine the system of government in which the people governed define their government by means of a constitution. The successes and failures of this concept are examined in detail.

Voting

Much attention has been given in the Public Choice field to the problem of voting. The simple approaches currently used have been shown to be defective as they do not always achieve the desired results. Alternative voting methods are examined and evaluated. Unfortunately, it has been difficult to modify our voting methods to reflect this knowledge.

A surprizing conclusion of Public Choice theory is that it is rational to not concern yourself with the issues or to bother to vote. I quote Jane S. Shaw from her article, "Public Choice Theory":

One of the chief underpinnings of public choice theory is the lack of incentives for voters to monitor government effectively. Anthony Downs, in one of the earliest public choice books, An Economic Theory of Democracy, (PDF version online here) pointed out that the voter is largely ignorant of political issues and that this ignorance is rational. Even though the result of an election may be very important, an individual's vote rarely decides an election. Thus, the direct impact of casting a well-informed vote is almost nil; the voter has virtually no chance to determine the outcome of the election. So spending time following the issues is not personally worthwhile for the voter. Evidence for this claim is found in the fact that public opinion polls consistently find that less than half of all voting-age Americans can name their own congressional representative.

Political Manipulations

Public Choice scholars have looked at the ways politicians interact with each other, the voters, and their supporters to achieve their own goals. Vote-trading, "log-rolling", wealth transfers, etc. are a few of the methods they use to obtain their own selfish ends -- and, occasionally, the wants of the citizens. See Tibor Machan's article, "The scope of public choice theory".

Rent-Seeking

Public Choice has much to say about the use of rent-seeking, which is the act of obtaining special treatment by the government at the expense of the rest of us. A specific and major case of rent-seeking -- the transfer of land to private organizations -- is discussed by Fred E. Foldvary in "Ground Rent Seeking in U.S. Economic History".

The Realities of Collectives

Finally, Public Choice scholars examine the options involved with solving the many social dilemmas resulting from living in groups or collectives. We know that private enterprise is not a good solution to the problem of the distribution of public goods. From that you cannot conclude that government can do the job better (in spite of the fact that many "scholars" do come to that conclusion!). Public Choice scholars address the challenge of determining what is the best "of the imperfect solutions".

To Learn More

An excellent place to start is the book, UNDERSTANDING DEMOCRACY: An Introduction to Public Choice listed in the Reference section below. After that, you should take a look at the classic: The Calculus of Consent by Buchanan and Tullock.

If you can't find that book, then a brief introduction is available in Jane Shaw's article mentioned above.

For an alternative and critical view of the successes and failures of the theory, consult the book by Green and Shipiro, Pathologies of Rational Choice Theory.

An excellent summary of the entire spectrum of Public Choice Theory is now online at Public Choice, From Wikipedia, the free encyclopedia.

The Public Choice Society is now online. There you will find current happenings in the academic community and a link to the table of contents for the Public Choice Journal.

Notes:

1.
If physics were taught with the same lack of organization, you would have to go to one department to study gases, another to study fluids, and another to study solids. For another example of the lack of centralization, consider the early days of computers. When computer science first hit the universities, it was often covered by several departments; Business, Engineering, Mathematics, etc. It took awhile before the courses were (mostly) consolidated under one department.

Links to other Public Choice sites, pictures and brief biographies of famous political economists, list of his books and essays, and other material are provided by Dr. John M. Cobin at his site at "Policy of Liberty".